Wednesday, April 10, 2013

Bitcoin or Gold?

The recent bail-in in Cyrus- where bank depositors were required to shoulder losses incurred by the banks- had enraged & frightened many depositors in Europe (here). No longer are depositors being subjected to mere stealthy losses in the form of constant under-measured inflation, they are now being robbed in the broad daylight.

One of the surprising outcome of that sad episode (or, was it just a coincidence?) is the sudden flight of depositors' money to a virtual currency, Bitcoin. Now, I know many readers may not be familiar with this modern invention. In fact, no one knows who invented Bitcoin. To read up on it, go here.

Henry Blodget, the Editor-in-chief of Clusterstock, half-jokingly put a price target of USD400 for a bitcoin (closed at USD191 as at April 8). He explained that it is entirely possible why Bitcoin to be a perfect bubble because it has four 'good' attributes, namely:

  • A good underlying story.
  • A sexy "new-ness" that requires some work to understand.
  • A small and finite supply. A fundamental "value" that is highly subjective and, therefore, justifiable at almost any level.
  • A high level of risk and excitement associated with trading it.

  • Timothy B. Lee- a contributor to Forbes & an associate writer to ars technica - feels that Bitcoin is worth studying.  To wit:

    As Adam Ozimek points out Bitcoin has so far largely been greeted with eye-rolling by professional economists. One reason is that the cryptocurrency’s most enthusiastic advocates tend to subscribe to a hard-money, end-the-Fed worldview that is unpopular among elites. That has caused the latter to reflexively take the opposite view, treating Bitcoin as primarily a monetary policy experiment and predicting its doom.

    My sympathies are with the pros here. Fiat currency isn’t perfect, but I think alternatives like the gold standard would be worse. But Bitcoin is a more than a gold standard for the Internet age. It’s the world’s first fully decentralized payment system, combining the irreversibility of cash with the convenience of electronic payment. There’s never been anything quite like it before, and as a result it poses a number of interesting intellectual puzzles. Here are four examples.

  • Monetary economics
  • Political philosophy
  • Economies of scale and competition policy
  • Data

  • Will Bitcoin morph into an alternative currency? Or, is it just a perfect bubble- in the same league as the Tulip mania- that would grow & grow until it goes bust? Only time will tell.

    Chart 1: Bitcoin's weekly price chart as at April 8, 2013 (Source:

    If you believe that Bitcoin is a search for an alternative currency, surely there is a good enough alternative right in front of us - Gold. Strangely, Gold has been consolidating in a descending triangle (see Chart 2 below) while Bitcoin has been rising exponentially (see Chart 1 above). In a world flooded with money, Gold - like any other hard assets that cannot be duplicated- must increase in value. If that premise holds true, then Gold price should not break below the current strong horizontal support at USD1530-1550. It could eventually break to the upside of the triangle (at USD1750) and continue its uptrend.

     Again, only time will tell whether this will pan out or not.

    Chart 2: Gold's weekly price chart as at April 8, 2013 (Source: Stockcharts)

    In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Bitcoin.


    Black Ink said...

    Whilst gold is great as a store of value it is lousy as a convenient, portable, divisible modern medium of exchange. How pray tell are you going to divide you precious gold bar to buy milk, diapers, toilet paper and peanut butter?

    Thats the great thing about bitcoins; convenient, divisibile, portable hence valuable.

    There will come a time when someone figures out how to crack its security, and forge them. Then we'll see.

    OwYang said...

    @Black Ink

    I think when they talk about gold as currency, they meant a paper currency backed by gold, not fiat.

    How did the people of the ancient civilization like the romans and chinese purchase their items with gold and silvers? gold coins and silver coins. That is how u divide them, maybe according to grams?

    As a person who is into computers, I do not trust BitCoin, it is too scammy to my liking. If it is man made, it can be duplicate.

    Maybe Gary Shillings was right, we are in the age of de-leveraging. Maybe with the growth in world population, the money are consumed faster than it can be created. Consumed as in used to purchase food, oil, bombs, etc...